Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
This article first appeared in the Telegraph
Summertime, and investing’s not easy. That’s the message from my recent conversations with fund managers, from surveys of their current views and from what really matters - where they are putting their money. The quiet back end of August is always a nervous time, especially when markets are testing new highs and we haven’t had a meaningful pull back in what seems like forever.
I had lunch (yes, really, in a restaurant) with James Thomson, manager of the Rathbone Global Opportunities Fund, this week. We honed in on four areas where market views are more polarised than either of us can remember. In the 17 years he has run that fund he has delivered his investors nearly three times as much as the global stock market as a whole. But his approach in this uncertain market environment is: ‘Billy, don’t be a hero.’
The first area in which investors can’t make up their minds is the question of market leadership. This matters to Thomson because he looks for under-the-radar growth stocks and in the first half of 2021 that was an uncomfortable place to be. A rapid vaccine-fuelled recovery meant that investors preferred cyclical areas like banks, energy, real estate, and industrials.
That all changed in July, according to ETF fund flow data from State Street, and the mantra is once again ‘safety first’. The three most defensive sectors - healthcare, consumer staples and utilities - saw $5bn of inflows in July after $3.6bn of outflows in the first six months of the year. By contrast, the most economically sensitive areas saw $7.2bn of outflows after they had taken in $57bn in the first half. Growth or value? The jury is out.
The second known unknown we discussed is inflation. Here, too, confirmation bias is the order of the day because you don’t have to look far to find the evidence to suit your case. Yesterday’s CPI print here in the UK was surprisingly low. There are early signs in the US as well that the recent price spike is running out of steam as the Federal Reserve always said it would.
But Thomson brought me a couple of charts to illustrate the other side of the argument. The first showed that last spring more than 30% of companies surveyed by Evercore described their inventories as too high while today more than 50% say they are too low. That’s because we’ve never before seen the demand collapse and then rebound as we’ve experienced in the past 18 months. The scale of the problem for businesses was highlighted by his second chart which showed how container shipping rates have risen six-fold this year.
The gap between ordering a computer chip and receiving it is at least 50% longer than it was two years ago. That’s causing shortages of new and used cars and so higher prices. Roofing costs are up 18% this year. Insulation is 24% more expensive. Both have seen four price rises this year alone. The cost of clothes is rising. When was that last the case? So, next week’s Jackson Hole summit, when the world’s central banks will help us understand the future path of monetary policy is unusually important this year.
Key question number three - are we at peak earnings? The answer will be related to how you answer the inflation question above because there are plenty of companies that are going to struggle to pass on the rise in their own input costs. The headline numbers that we have all been enjoying during the second quarter earnings season - profits up 90% on a year ago, four fifths of the S&P 500 beating expectations - are skewed by the kinds of big companies that have long-term hedges in place and the pricing power to ride out a period of higher costs. Smaller companies will feel the heat sooner. Simple arithmetic also says the current pace of earnings growth can’t last and the numbers for the third and fourth quarters, while still looking strong, won’t be anything like as good.
Bank of America conducts a survey each month of fund managers’ views. Expectations about the outlook for the global economy are now at their lowest since April 2020. Investors are less optimistic about earnings and they expect profit margins to decline, which they haven’t been saying for a year now. But for Thomson, it’s more nuanced. He is shifting to companies where earnings were ‘hibernating during lockdown and which are now starting to reawaken’. He sees potential in industrials: ‘a rare confluence of bullish indicators as demand improves’.
James Thomson on the investment changes in the Rathbone Global Opportunities Fund over the last 18 months
Inflation, growth and market leadership - three questions with many more possible answers. The fourth question we covered is trickier, evokes even more bifurcated views, but may in the longer run be even more important. What to do about China?
Chinese state-run capitalism is clearly different from the western model that investors are more familiar with. Thomson sees the uncertain pendulum swing from ‘charm offensive to crackdown’ as too uncomfortable an environment for a global investor and with the freedom to roam around the world’s markets he recently exited his last major position in the country - technology giant Tencent. But he knows that plenty of others take a diametrically opposed position on China. BlackRock this week said global investors should have two to three times their current allocation to China. Retiring head of global equities at Baillie Gifford, James Anderson, thinks the valuations of Chinese shares ‘exaggerate the danger to them’. Ray Dalio at Bridgewater Associates says investors should focus on China’s 40-year move towards an entrepreneurial market economy and not worry about the short-term wiggles.
Enjoy what’s left of the summer. All four of these questions will need answering soon enough.
Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. The Rathbone Global Opportunities Fund invests in overseas markets, so the value of investments will be affected by changes in currency exchange rate and investments in emerging markets can be more volatile than other more developed markets. Select 50 is not a personal recommendation to buy or sell a fund. The fund invests in a relatively small number of companies, so may carry more risk than funds that are more diversified. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.
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